Impact of buyer’s credit ban on import financing in India — what are the options for importers to still get cheap foreign currency financing?

by Divya Tailang

On Mar 14, 2018 RBI, barred Indian banks from issuing LoUs and Letter of Comforts, the instruments which were primarily used to support Buyers Credit by Importers in India. The total short-term Trade credits (Buyers Credit and Suppliers Credit below 3 years) outstanding in India before the ban on LoUs was estimated at approx. USD 90 Billion and Buyers Credit formed majority of this outstanding. Buyers Credit was used as a cheap source of financing working capital cycles by the importers.

It can be safely assumed that with the lack of availability of foreign currency denominated Buyers Credit to support imports, many Importers might have made up for the Trade credit shortages by borrowing under their expensive rupee line of credits or moved to domestic procurements (which might have been costlier than imports). This was mainly the case with SMEs in India who were either not aware of alternative methods.

While the Buyers Credit in its previous form has been discontinued by RBI, all is not lost and importers still have options to finance their imports in foreign currency. We explain two most widely used structures which are very popular globally but have not been used much by SMEs in India.

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